U.S. stock market to start week on same shaky ground

European debt issues and the oil spill in the Gulf part of Wall Street's focus

By

KateGibson

NEW YORK (MarketWatch) -- The U.S. stock market next week is likely to continue riding the same volatile wave that has investors more focused on environmental disasters and geopolitical events than economic reports and corporate earnings.

"The U.S. stock market remains headline news driven as traders react to each new positive or negative news headline, particularly those centering on Europe and the Gulf of Mexico," said Fred Dickson, chief market strategist at Davidson Companies.

And, while investors were looking at the economic data for confirmation that the recovery continues, there was also a general reluctance to leave cards on the table ahead of the weekend, given the possibility for developments overseas as well as domestically.

On Friday, U.S. stock indexes finished strong at the end of a volatile session to record daily gains and bolster weekly gains after an unexpected drop in May retail sales. Partially offsetting the Commerce Department retail sales report was a hike in the Reuters/University of Michigan consumer sentiment, which climbed to its highest mark since January 2008.

The Dow Jones Industrial Average
DJIA, -1.24%
rose 39 points, or 0.38%, to end at 10,211, leaving it up 2.8% for the week. The S&P 500 Index
SPX, -1.54%
rose 5 points, or 0.44%, to end at 1,092 up 2.5% from the prior Friday's close. The Nasdaq Composite Index
COMP, -1.94%
rose 25 points, or 1.12%, to 2,244, leaving it with a weekly rise of 1.1%.

Gold futures finished with a weekly gain of 1%, but off 1.2% from Tuesday's record close of $1,245.60 an ounce, while crude-oil futures fell under $74 a barrel.

Wall Street's end-of-the week retreat came one day after the stock market's strongest performance since late May, with the Dow rising 273.28 points in its third-biggest daily jump so far this year.

"Powerful stock market rallies seen over the course of the current six-week market correction have been followed by a day or two of price consolidation, then more selling pressure," said Dickson of Friday's lackluster performance.

Friday's disappointing retail sales report had investors fleeing to investment vehicles viewed as a safe bet. The flight from riskier assets had the U.S. dollar, the globe's most actively traded currency, resuming its climb against the beleaguered euro.

While the retails sales report served to undermines the market's fragile sentiment and push the greenback higher, it also inspired fears of a double-dip recession as the weakness in consumption follows "the disappointing jobs report a week ago," said Marc Chandler, Brown Brothers Harriman & Co.

The euro
EURUSD, +0.0682%
on Thursday hit a one-week high as Spain and Italy successfully refunded sovereign debt with new bond auctions and words from the European Central Bank helped calm worries about Europe's debt trouble dragging on the global economy.

Crude awakenings

On Friday, BP Plc
BP, -0.55%
shares staged a partial comeback after falling to a 13-year low the prior day as a government panel basically doubled its estimate of how much oil has been pouring into the Gulf of Mexico. The latest estimate was 25,000 to 30,000 barrels a day.

The British oil giant was under pressure from President Barack Obama to suspend its dividend, with BP reportedly considering the option after the April 20 blast on the Deepwater Horizon rig that killed 11 workers.

"BP may be taking the brunt of the negative sentiment, but the calls to expand and extend the drilling moratorium, the inability to get the job done in the Gulf, and the expanding negative sentiment against the industry is wielding political power to do damage to this sector," said Marc Pado, U.S. market strategist at Cantor Fitzgerald.

Morgan Stanley
MS, -2.00%
and JPMorgan Chase & Co.
JPM, -1.56%
are likely to be the lead underwriters in bailed-out auto manufacturer German Motors' initial public offering which could prove as large as $10 billion, according to the Wall Street Journal, citing people familiar with the matter.

Estimated share-weighted earnings for the S&P 500 for the second quarter 2010 stood at $184.2 billion as of Friday, slightly under the prior week's $184.3 billion, according to research compiled by Thomson Reuters analyst John Butters.

With the peak weeks of the first-quarter earnings season now finished, the next few weeks will bring the last trickle of S&P 500 companies reporting earnings for the first quarter, and the first few corporations reporting results for the second.

"Technically, fundamentally, geopolitically, and globally, there is a huge 'wall of worry' that has been built since the April high," said Marc Pado, U.S. market strategist at Cantor Fitzgerald.

However, there is a carrot on the other side of the wall," said Pado, who adds that companies which had been anticipating even worse economic conditions are now sitting on a pile of cash, keeping inventories tight and a lid of new hires.

"That means they will be reporting exceptional profit margins, solid earnings, and against easy comparisons. This is the carrot on the other side."

Economic data in the days ahead includes reports on consumer and producer prices, housing, industrial production and weekly jobless claims. Just how much attention any of these reports receive in the current climate on Wall Street remains to be seen.

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